For the first time since 2014, the price of oil trades above $80 per barrel. The Brent oil futures with expirations in December 2021 traded at $83.86 per barrel on Oct. 12, while the Crude oil West Texas Intermediate (WTI) with expirations in November 2021 traded at $ 80.66 per barrel.
For about seven weeks now, oil has been on the rise, and the global demand recovery for oil coupled with supply chain issues should help drive the price further up over the next couple of weeks. In fact, prices are expected to remain high for the whole winter. Economists believe that due to high natural gas and coal prices, oil is now more sought-after than before as a source of energy. That’s why the demand is going up fast. Despite OPEC and Russia allowing production to grow steadily and gradually until September 2022, this measure is not seen as sufficient to cover the future demand for oil.
Looking ahead, economists estimate that the price per barrel of oil may exceed $90 within the next 12 months. This would represent a more than 12% increase from current levels. With rising oil prices, it makes sense for investors to increase their holdings in publicly traded oil operators that can take advantage of the improved oil price environment.
Among energy stocks, investors could be interested in ConocoPhillips (COP, Financial), as this Houston, Texas-based energy operator stands out of the crowd for its enviable financial conditions and the strong profitability of its operating activities. The stock is well-positioned to continue delivering strong margins, which, if helped by an expected increase in raw materials prices, could potentially send the share price soaring.
ConocoPhillips enjoys the remarkable cost-effectiveness of its operations on 4.5 billion barrels of oil equivalent stored in proven and probable mineral reserves; therefore, the company tops most of its competitors in terms of higher Ebitda margin.
In the first half of this year, the company produced a daily average output of 1.52 million barrels of oil equivalent, up 34.3% year over year, and the average realized price was $47.79 per boe, up 49% year over year. This gave a strong contribution to ConocoPhillips' Ebitda margin, which at 37.3% of the total revenues surpassed the industry average.
In addition to unconventional plays located in North America, ConocoPhillips' output is also produced from conventional mineral assets that the company is operating in North America and Europe as well as other countries across Asia and Australia. ConocoPhillips holds development activities on numerous liquefied natural gas assets as well as mining activities on oil sands assets located in Canada.
The oil and gas industry is capital-intensive, and loan capital provides ConocoPhillips with more than three-quarters of the total resources necessary to maintain and develop total assets worth more than $85 billion as of the writing of this article.
Nevertheless, the company can can still keep making its interest payments for now as its interest coverage ratio is 2.93, meaning the balance sheet can generate sufficient cash to honor financial obligations in the short-term. As long as the company does not become any less profitable, it should not run into isssues.
The company also pays quarterly dividends. The next payment, $0.46 per common share, is scheduled for Dec. 1 and represents a 7% hike from the prior distribution.
The stock price traded at $73.97 per share at close on Friday for a market cap of $99.15 billion.
The stock rose 112% over the past year, fluctuating in a 52-week range of $27.53 to $75.52. Following this, the share price now is significantly above the 50-day moving average value of $61.21 and the 200-day moving average value of $57.31. Also, the price-earnings ratio is 63.77 and the price-book ratio is 2.24.
The dividend yield of 2.33% and the higher oil prices make this investment worth the risk, in my opinion. Wall Street seems to agree, as analysts recommend a buy rating with an average target price of $79.23 per share for the stock.
Disclosure: I have no positions in any security mentioned.
